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Busting the Small Business Funding Myth

Americans who read business news and watch popular TV shows such as Shark Tank and Silicon Valley often get the impression that venture capital is what makes starting a business possible.

But in reality, only a tiny portion of business startups are funded by venture capital.

According to research by the Kauffman Foundation – a non-profit devoted to entrepreneurship – only 4.4 percent of the fastest growing small companies in America received venture capital. Another 5.8 percent had angel investors. So even if you combine the two, only one in 10 fast-growing small businesses are backed by this type of funding.

And if you survey a wider cross section of businesses – those not included in the elite segment of fastest growing companies – the portion receiving venture money would be even smaller.

More Traditional Sources Prevail

So where do most startups find funding? According to the Kauffman survey, the largest single source of financing is bank and other types of loans. About 35 percent of startups receive funding from those sources.

Another 30 percent of startups are funded by personal savings; 6.3 percent from family and friends; and 6.2 percent are financed via credit cards. Another 2.0 percent receive some kind of government-related grant or financing.

Small business loans from banks are actually on the rise. Consider TD Bank, for example. Its small business group recently doubled its monthly average amount of small business loans, and projects a continued increase in borrowing.

According to Jay DesMarteau, who heads small business lending at TD Bank, some benefits of bank financing include a wide variety of loan types, favorable rates, and the ability to establish an ongoing relationship with a local business banker.

Unlike venture capital firms and angel investors, banks offer a wider range of financing options to fit different small business needs. And many banks are offering flexible terms and highly favorable rates as well. What’s more, business owners working with banks can often get discounts by using more of the bank’s products.

And one of the most important differences of bank loans compared to venture funding is that entrepreneurs retain full ownership of the business. Venture capital and angel investments aren’t loans, and don’t generally have to be paid back. But the investors will take ownership of a big chunk of the business.

Getting Your Foot in the Door

If you have trouble getting a loan or other types of bank credit or financing for your business or startup, here’s something that might work: Apply for an unsecured small business line of credit.

Start small – basically with whatever size line a lender is willing to provide. The important thing is to get a foot into the bank financing door. Even if the credit line is small, put it to immediate use and pay it off diligently and always on time.

Once you’ve established a track record, you can seek to expand the credit line in small steps. Many major banks that serve small business offer unsecured business credit lines of $5,000 to $100,000.

A business credit line is a flexible financial tool that can help you grow if you use it right. And even if you don’t have an immediate need for credit, it’s handy to have if business conditions change.

Establishing the revolving credit line is cheap, you only pay interest on what you borrow and you can use the line for almost anything.

Credit lines are also appealing because of their low costs. Interest rates will vary with prevailing market rates, but many lenders allow you to tap the line – via paper check, online, check card or other method – for no fee. However, you can expect to pay a modest fee to open the account once you’ve been approved.

You should also ask if the lender offers some kind of interest rate protection or lock-in feature to protect you against rising rates in the future. Some lenders will let you lock in an interest rate on your business line of credit for a year.

About the Author(s)

Daniel Kehrer, Founder & Managing Director of BizBest Media Corp., is a nationally-known, award-winning expert on small and local business, start-ups, content marketing, entrepreneurship and social media, with an MBA from UCLA/Anderson.